You can earn Clubcard points on your monthly mortgage repayments, but are Tesco's new mortgages actually a good deal?

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Complete with a customary Clubcard point incentive, Tesco claims its mortgages – which will be available from Monday 6 August – will offer the ‘value, customer service and reward’ expected by its customers.

But what do the experts say?

Tesco’s mortgages

Tesco Bank, which currently has around 6.5 million customers, is offering a range of two-, three- and five-year fixed rate mortgages as well as a two-year tracker deal, with rates starting at 3.19%. The maximum loan to value (LTV), ie, the most you can borrow against the price of the property, is 80%.

All mortgages have a flat booking fee of £195 and customers can choose between a £0 and £800 product fee depending on their circumstances.

The rates

Product

Max LTV

Initial rate for £800 fee option

Intitial rate for £0 fee option

2-Year Fixed

70%

3.19%

3.59%

75%

3.59%

3.99%

80%

3.99%

4.39%

3-Year Fixed

70%

3.69%

3.99%

75%

3.99%

4.29%

80%

4.39%

4.69%

5-Year Fixed

70%

3.89%

4.29%

75%

4.19%

4.59%

80%

4.69%

5.09%

2-year Tracker

70%

BoE* +2.69%

BoE +3.19%

75%

BoE +2.89%

BoE +3.39%

80%

BoE +3.49%

BoE +3.99%

*Bank of England base rate

All customers are able to make regular or lump sum overpayments of up to 20% without having to pay an early repayment charge, Tesco added. Those who opt for a tracker mortgage, meanwhile, have the option of switching to a fixed deal later down the line should they want to.

Tesco is also promising to reward its Clubcard customers with one point for every £4 of their monthly mortgage repayments. Although, if mortgage customers spend an average of £9,000 a year on their mortgage, they will only earn some £22 in points, according to Tesco – though this increases to £88 if they trade their points for vouchers to use on travel, days out or in restaurants.

Disappointing rates

Tesco’s new range of mortgages is ‘disappointing,’ said Sylvia Waycot of Moneyfacts, the financial products analyst.

‘Despite having successful cards and loans to its credit, Tesco Bank on entering the mortgage sector have not launched any market leading deals,’ she said. ‘Its current proposition of fixed and tracker mortgages can be beaten by what is currently on the high street.’

David Hollingworth of mortgage broker London & Country Mortgages, however, said that Tesco’s launch was about what you'd expect from a newcomer with new systems and processes to get a handle on.

‘I’d be questioning Tesco’s sanity if it was offering anything more right now,’ he said. ‘Its mortgages are by no mean market leaders but they are fairly priced’.

Ray Boulger of broker John Charcol agreed, saying that launching an ‘uncompetitive range’ was a sensible move as the best way to test new systems was to do so with low volumes.

‘However, these initial rates look sufficiently uncompetitive to question whether they will generate enough volume to even do that,’ Boulger added.

‘Taking the five-year fixed rates as an example, its rates are at least 0.5% higher than the most competitive lender at each of its three LTV bands (70%, 75% and 80%), with many of the cheaper competitors also offering lower fees on purchases,’ he said. ‘For borrowers who only need an LTV of 60% or less Tesco is even more uncompetitive’.

So, unless Tesco has redefined the word competitive, as Boulger said, the supermarket’s claim that its mortgages offer competitive rates is completely unfounded.

Clubcard promise is a 'gimmick'

Boulger also described Tesco’s Clubcard offering as a ‘gimmick’ and urged customers to view the reward points as a modest bonus rather than a reason to choose a Tesco mortgage.

And as Andrew Montlake, of mortgage broker Coreco, said: ‘The prospect of mixing groceries, Clubcard points and the largest loan you are ever likely to take out will not appeal to all’.

Boulger, meanwhile, criticised Tesco for limiting its availability to online and phone applications.

‘For something as complicated as choosing the right mortgage most borrowers prefer face to face contact, as well as wanting advice,’ he said.

What’s more, while allowing overpayments of up to 20% without an early repayment charge is a good feature, few borrowers will be able to take advantage of this in full.

Every little bit of competition helps

The good news, however, is that the market now has a brand new mortgage lender – albeit a fairly vanilla one – which should help increase competition and improve deals for customers, Hollingworth said.

The mortgage market has contracted in recent years, with the likes of Santander and Lloyds Banking groups taking over what were previously major players such as Alliance & Leicester, Bradford & Bingley and HBOS, he said.

In fact all the experts we spoke to have welcomed the additional competition Tesco's new mortgage range will bring. And as as Montlake put it, Tesco will help 'keep the big banks on their toes'.

What's more, as Boulger pointed out, Tesco has no baggage from a back book of mortgages at rates which are under water or where there is little or no equity, which is very expensive in terms of regulatory capital requirements.

'Tesco also has a better credit rating than most of our banks and hence will be able to fund itself more cheaply,' he said. 'Once it has satisfied its systems are working well, and it has ironed out any teething problems, beefing up its rates to make them competitive should still allow a good level of profitability.'

However: 'Will Tesco adopt the old 'pile it high and sell it cheap' policy of the early supermarket days? Time will tell.'

Marks & Spencer also revealed plans to enter the mortgage market earlier this year, though its money venture is not a solo one like Tesco as its products are provided by HSBC. Tesco, which previously took its banking services from Royal Bank of Scotland, has said it also intends to enter the current account market, but has delayed its plans until 2013.

-Given that they are not competitive rates, whose mortgage facility are they actually rebadging, I wonder?

-Someone in the article said it will keep the high street banks 'on their toes'

Until I read that I didn't realize that there was anyone left in the UK stupid enough to believe that there is any kind of functioning competitive market operating in Retail Financial Services in the UK...It is all a rigged cartel that is groomed for excessive profit(and in theory therefore taxes) by the state...The supermarkets are doing what they have always done, re-badging and selling other peoples wares.Their added value is of no consequence as they are only marketing innovators not technical/product innovators

I say: Break up the banks and return them to not-for-profit social ownership now!